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Dubai Banks Capitalizing on Shifting Diamond Trade Routes
Q&A with Davy Blommaert, Unit Head – Precious Metals & Diamonds at National Bank of Fujairah
May 29, 2015 11:07 AM
By Ronen Shnidman
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RAPAPORT... Davy Blommaert is the head of the diamond lending segment of the National Bank of Fujairah (NBF) in the United Arab Emirates (UAE). The bank was founded in 1982 with a focus on corporate and commercial banking. Today, it has three major subsidiaries: NBF Financial Services, which is located in the Fujairah free trade zone; NBF Capital, which is situated in Dubai and NBF Trade Services, which is based in Hong Kong. NBF and fellow Dubai banks Emirates NBD and Mashreq Bank have captured the attention of many in the industry with aconcerted effort to develop their diamond lending portfolios.
 Rapaport News: How did you reach your current position at the National Bank of Fujairah?
DB: I started out as finance manager and legal counsel for International Diamond Laboratories DMCC (IDL) and served in that position from 2007 to 2009. IDL was a subsidiary of the Dubai Multi Commodity Centre (DMCC) and, as a lab, it graded polished diamonds and jewelry. I helped set up IDL’s operations in locations as diverse as Mumbai, Antwerp and Istanbul.
I then moved into a business development position at the Antwerp Diamond Bank (ADB) where I spent six years. I handled relations with ADB’s clients in Antwerp and then Hong Kong before I was placed in charge of ADB’s Dubai office.
After ADB announced its closure, I joined the National Bank of Fujairah as the unit head in charge of the diamond portfolio of the bank’s precious metals and diamonds segment within its corporate and institutional banking division.
RN: Why is NBF moving into diamond lending while some of the more established players are winding down their loan books?
DB: I think the established players are winding down their loan books for reasons that are specific to their businesses. It has nothing to do with diamond lending being unprofitable. I believe that banks in the UAE are now entering diamond lending as a result of a geographical shift that has taken place in the business.
Antwerp has been the major hub for the rough diamond trade for a long time. Within the Antwerp market, ADB provided 40 percent of total financing but it is now winding down its business and a substantial part of the financing in Antwerp is disappearing.
At the same time, De Beers has shifted its sights from London to Botswana.
Geographically, Dubai is much better located than Antwerp to facilitate rough trade between the sights taking place in Gaborone and the polishing factories in India. Also, flight connectivity between Botswana and Brussels is not the most efficient. Dubai, on the other hand, is well positioned along the ‘New Silk Route’ from Africa to South and East Asia.
The combination of declining credit availability in Antwerp, and De Beers move from London to Gaborone is attracting more diamond business to Dubai. It stands to reason that if more diamond business comes to Dubai, the banks here will have a lot more requests for local financing. The UAE banks have recognized that opportunity and are grabbing it.
RN: What sort of financial indicators does NBF look at when considering a loan?
DB: It is a mix of revenue and profitability. In order to attain creditworthiness, a company must have a certain level of turnover. However, business operations cannot just emphasize turnover and size without taking profitability into account.
We don't want to finance an unprofitable business. It doesn't matter if a company has $5 billion in turnover if it is operating at a loss.
The profit margins we are looking for depend on the segment of the pipeline you are in. Rough has a different profit margin than polished and diamond manufacturers and jewelers have different margins as well. We always do a bit of peer analysis when we consider lending to a company. Your creditworthiness is measured by your performance relative to your peers.
RN: What parts of the pipeline does NBF currently provide loans to and what segments do you intend to finance?
DB: For the last 10 years NBF has developed quite a lot by financing the gold bullion and jewelry segment, including jewelry retail here in Dubai and the surrounding areas. Since I joined NBF earlier this year, we’ve moved into financing rough diamond purchases for rough trading, manufacturing and polished trading.
However, we only intend to provide loans to Dubai-based companies for the purpose of financing their trade from Dubai. We will not finance to Belgium or India-based companies. Even among the larger corporate groups, we only want to develop a relationship with a Dubai-based subsidiary, if they have one. We will not build a relationship with a parent company based elsewhere.
Most Dubai-based subsidiaries are focused on sourcing rough diamonds for their parent company. They source the rough and then sell all or part of it to be manufactured in India. This means that we will finance the intergroup sales from Dubai to India based on the financials of the Dubai-based company, the India-based company and the financials of the entire group. We will create a loan facility that is tailor-made to suit their needs.
When it comes to rough purchases, we are willing to finance up to a maximum of 90 percent of the transaction, depending on the business model of the client.
RN: How has the delayed implementation of Basel III in the UAE affected NBF’s diamond lending plans?
DB: Basel III is mainly concerned with implementing rules regarding the quality of capital and the liquidity requirements for the banks themselves. The requirements regarding capital adequacy were already dealt with in the Basel II accords. Therefore, the current round of the Basel Accords has no impact. The Basel accords encourage banks to look at their loans and investments on a case-by-case basis and evaluate the risk of each client. The bank must then allocate sufficient capital to cover the financial risk presented by each client. NBF has already done this.
Basel and the new rules for banks boil down to ensuring that there is a decent risk-reward ratio and return on capital investment for banks. Personally, I feel that over the last several years some diamantaires had access to bank credit that was too cheap. In other words, the risk-reward ratio for the bank was completely off. It even incentivized certain diamond players to start engaging in speculative behavior.
To create a win-win situation for diamantaires and the banks that finance them, I believe interest rates have to rise a bit. The rates some people received in the past were incredibly low. This does not mean that the banks should go to the other side of the spectrum and start charging sky-high rates because that too is unsustainable.
However, in order to build a long-term sustainable relationship, a balance has to be achieved whereby a bank gets a decent return on capital employed and speculative behavior is not incentivized. This will return the diamond industry to a more stable and sustainable path, which is good for everyone in the business in the long run.
RN: How likely is it that diamantaires will turn to alternative methods of finance besides bank loans?
DB: To be honest, I don't think that other forms of debt and equity financing are particularly viable for the diamond industry, except for the top five or so diamond companies. These companies are set up as large corporations and are already going to capital markets with inventory-backed or receivables-backed securitization programs.
Besides those top five though, I don't see too many people seeking and attracting funding from the capital markets because diamond companies are still predominantly smaller concerns run by families.
The smaller companies that are finding it difficult to improve their financial reporting and transparency to meet the requirements of specialized diamond banks are not going to have an easier time overcoming the hurdles to raising money from the capital markets.
What advice would you give to a diamantaire with a growing business who is thinking about seeking his first significant diamond loan?
The most important thing is to make sure that you have a good market reputation. I check a client’s character through industry references and the character and reputation of a potential client still plays a key role in the decision to approve a loan. Apart from financing, one also needs a good reputation in order to conduct business in this market in a sustainable and profitable manner.
In addition, make sure that you run your business in a professional manner with the necessary emphasis on corporatization. You should have audited and transparent accounts and suitable financial controls in place.
Lastly, and perhaps most importantly, don't be too shy. That means, don't assume that you cannot get a loan before talking to us. Sit and talk with us and we will see where we can meet each other. If your balance sheet or business is not ready yet, there is no shame in coming and asking us what you can do to improve things so you will be ready at a later date. Part of our job is to help clients evolve and aid them in growing their business.
RN: How do you see the National Bank of Fujairah developing in the next five years in terms of its lending to the diamond industry?
DB: We hope to have a sizeable portfolio and a sizeable market share of total bank lending to the diamond market in Dubai. Our focus is on financing Dubai-based companies and we currently have no intention to expand elsewhere.
It was also made very clear when I joined the bank that we have no limit or target in terms of the size of our diamond loan portfolio. Every loan is approved on a case-by-case basis. If a client meets our internal criteria and we want them to bank with us, then we will see how we can accommodate their credit requirements. It's about the quality of our clients, not the quantity.
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Tags:
Banking, Dubai, finance, loan, National Bank of Fujairah, NBF, Ronen Shnidman, uae
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